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Monday, 01 September 2014

Waiting to exhale

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  • Waiting to exhale

After a promising start to the year Mongolia’s capital markets experienced a sudden lull partly due to political tensions and mining industry woes. But the tide seems to be turning slowly.

To view the digital version of this report, please click here.

The year started so well. In mid-March, state-owned Development Bank of Mongolia sold a debut US$580m five-year Reg S bond via Deutsche Bank, HSBC and ING. It priced at par to yield 5.75%, comfortably inside initial guidance levels of 6.00%–6.25%; it drew orders totalling US$6.25bn; and attracted more than 300 investors.

Even though the bonds carry an unconditional and irrevocable guarantee from the Ministry of Finance on behalf of the Government of Mongolia, which made it a proxy for the sovereign, it was a classy debut by any reckoning (after the break it quickly traded up to 101.20/101.50) and an indication of the demand for exposure to the frontier markets.

The ground in the country’s offshore bond market was broken for Development Bank of Mongolia by a couple of previous Mongolian issues, both of them from the Trade and Development Bank of Mongolia, the oldest and one of the largest banks in the country.

At the end of January 2007, TDBM dipped its toes in the water with a US$75m three-year 8.625% bond priced at 99.676 to yield 8.75%. It was followed up nearly four years later in October 2010 with a US$150m three-year Reg S that was reoffered at 99.353 with a coupon of 8.5%, again to yield 8.75%.

Little wonder then that Development Bank of Mongolia did so well. It had rarity value behind it and, by many people’s reckoning, Mongolia should be a safe bet. The country grew 17.3% last year thanks to the mining industry. No surprise then that Development Bank of Mongolia was followed into the international markets two weeks later by high-quality coking coal producer and exporter Mongolian Mining Corp. It priced a US$600m global at the tight end of final guidance of 8.875%–9.00% (revised down from an initial mid-9% area) via Bank of America Merrill Lynch, ING and JP Morgan.

Dear diary moment

The deal was a dear diary moment for a number of reasons. It was the largest bond out of Mongolia to date; it was the country’s first corporate deal; the country’s first 144a issue; and the largest debut issue from a Single B rated Asian corporate credit in the past five years. Like Development Bank of Mongolia, MMC attracted a massive book – in the end US$5.6bn from 330 accounts – and the move to try and attract US investors was a gamble that paid off. Well over half of the accounts that came in were from the US with the rest equally split between Europe and Asia.

Moody’s was bullish in its outlook for the country. “The exploitation of the Oyu Tolgoi copper field and other large mineral deposits, such as Tavan Tolgoi’s high-grade coking coal, will lead to significant structural changes in the economy and provide a windfall to government finances from 2013 onwards, based on the current state of developments,” it said in a report.

Suspended animation

But since then … nothing. To take advantage of what they saw was clear appetite for all things Mongolian, in early April Ulaanbaatar-based community development bank XacBank planned a three-year Reg S of about US$100m via ING and UBS. There was even price whisper of around 10%, but its debut dollar bond was quietly shelved.

The same thing happened to Golomt Bank, the country’s largest privately owned lender. Golomt tried to follow in XacBank’s wake in mid-April. It set up investor meetings for a Reg S/144a deal up to US$200m via Deutsche Bank, Morgan Stanley and UBS. But again it decided against coming to market. “There wasn’t necessarily a deal out there when it was announced it had said there might be one to follow,” said a source close to the borrower at the time.

A month later, government-controlled State Bank of Mongolia sent out RFPs for offshore issuance. Thanks to that government control, it had hoped to follow the examples of Development Bank of Mongolia and Mongolian Mining Corp rather than either XacBank and Golomt, but again nothing appeared then or since.

And it is not just bonds that are in suspended animation, equities are too. Erdenes-Tavan Tolgoi, the owner-operator of one of the largest coking coal deposits in the world, had originally planned its US$3bn IPO before the country’s elections in June. It was then pushed back to the third or fourth quarter. At the time of writing it is now planned for the first quarter of 2013.

Challenges

So what happened? Politics partly accounts for some of the problems. Towards the end of July this year, after a month-long horse trading, a new coalition government was formed, led by the Democratic Party. The DP deposed the Mongolian People’s Party which grew out of Mongolian People’s Revolutionary Party and had run the country pretty much since 1921.

The challenge that Prime Minister Norovyn Altankhuyag has been struggling with is that 25 out of 76 members of parliament are what have been dubbed “resource nationalists”, including the minister for mining, Ganhuyag Davaajar.

These resource nationalists want a much stricter line taken on mining contracts, indeed they are demanding that mining contracts signed with foreign firms be renegotiated in the government’s favour. Last year, Ganhuyag signed a letter urging Rio Tinto and Turquoise Hill Resources – then known as Ivanhoe Mines – to renegotiate a 2009 agreement for the US$13bn Oyu Tolgoi mine and to up the government stake from 34% to 50%.

As Aegis Advisory notes in a strategic risk alert: “Investors should brace for two to four quarters of turbulence as Mongolian politics works through its current bout of resource nationalism.” And concerns about stability will not have been eased when the country slipped from 116th place to 120th in Transparency International’s corruption perception index last year.

“Insular thinking like this has really not helped deals get off the ground,” said one Asian-based banker.

The second issue was difficulties being experienced more widely in the mining sector. Slowing growth in China has triggered falls in key commodity prices and prompted the delay or cancellation of major expansion plans. It is worth noting that mining companies lost 27% of their market value in the 12 months to the end of March this year as global economic volatility curbed demand for resources.

But there is always light at the end of the tunnel. That emerged in mid-September with a US$300m 8.5% three-year Reg S from Trade and Development Bank of Mongolia via Bank of America Merrill Lynch and ING. It gathered a book of over US$1.2bn from more than 150 accounts.

A mixture of pent-up demand and more optimistic credit markets saw three B name credits print that week, but the Mongolian deal stands out because it priced so tightly. The bank’s previous deals all printed to yield 8.75%, while this one was reoffered at 99.676 to yield 8.625%. And there is hope too that more could emerge.

“We could see at least one more name before the end of the year,” said one banker.

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